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Apple Loses E-book Case After Judge Says It Played A 'Central Role' in Price-Fixing Conspiracy

A little more than a year after the government accused Apple of conspiring with the major book publishers to raise e-book pricing when it launched the iPad in 2010, a federal judge sided with the Department of Justice today and said Apple played a “central role” in the price-fixing conspiracy.

The government was able to show that Apple and the publishers “conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy,” U.S. District Court Judge Denise Cote said in a 160-page opinion after hearing evidence from both sides during a trial in New York that ran from June 3 to June 20. “Without Apple’s orchestration of this conspiracy, it would have succeeded as it did in Spring 2010…Apple and the Publisher Defendants shared one overarching interest – that there be no price competition at the retail level.”

The decision comes after the US DOJ filed suit against Apple and Hachette, HarperCollins, Macmillan, Penguin Group and Simon & Schuster in April 2012, saying they worked together to raise e-book prices and undermine Amazon’s e-book market lead. Up until 2009, Amazon sold nearly 90 percent of all e-books. All the publishers settled with the government, with only Apple proceeding to trial. The government called Apple executive Eddy Cue, head of iTunes, and used emails by former CEO Steve Jobs discussing setting prices at $12.99 to $14.99, above the discounted $9.99 price for e-books offered by Amazon.

Apple said today that it will appeal the decision.

“We’ve done nothing wrong,” Apple spokesman Tom Neumayr said in a statement today. “Apple did not conspire to fix e-book pricing. When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry.”

The DOJ said that it was able prove that with help from Apple, the publishers were able to raise the average price of e-books by 18 percent as a result of their conspiracy. ““This result is a victory for millions of consumers who choose to read books electronically,” Assistant Attorney General Bill Baer, who is in charge of the DOJ’s Antitrust Division, said in a statement. ”The court agreed with the Justice Department and 33 state attorneys general that executives at the highest levels of Apple orchestrated a conspiracy with five major publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster – to raise e-book prices. Through today’s court decision and previous settlements with five major publishers, consumers are again benefitting from retail price competition and paying less for their e-books.”

Here are some highlights from Cote’s decision:

• On forcing Amazon to abandon its pricing. “There is, at the end of the day, very little dispute about many of the most material facts in this case. Before Apple even met with the first Publisher Defendant in mid-December 2009, it knew that the “Big Six” of United States publishing…wanted to raise e-book prices, in particular above the $9.99 prevailing price charge by Amazon for many e-book versions of New York times bestselling books and other newly released hardcover books. Apple also knew that Publisher Defendants were already acting collectively to place pressure on Amazon to abandon its pricing strategy.”

• On Apple being eager to conspire. “The Publishers conveyed to Apple their abhorrence of Amazon’s pricing, and Apple assured the Publishers it was willing to work with them to raise those prices.”

• On getting the Publishers to offer a deal for the iPad with iBookstore. “Apple strongly hoped to announce its new iBookstore when it launched the iPad on January 27, 2010, but would only do so if it had agreements in place with a core group of Publishers by that date, could assure itself it would make a profit in the iBookstore, and could offer e-book titles simultaneously with their hardcover releases.”

• On the goal of no price competition. “Apple and the Publisher Defendants shared one overarching interest — that there be no price competition at the retail level. Apple did not want to compete with Amazon (or any other e-book retailer) on price; and the Publisher Defendants wanted to end Amazon’s $9.99 pricing and increase significantly the prevailing price point for e-books. With a full appreciation of each other’s interests, Apple and the Publisher Defendants agreed to work together to eliminate retail price competition in the e-book market and raise the price of e-books above $9.99.”

• On the shift to an agency model. “Apple seized the moment and brilliantly played its hand. Taking advantage of the Publisher Defendants’ fear of and frustration over Amazon’s pricing, as well as the tight window of opportunity creatd by the impending launch of the iPad on January 27 [2010], Apple garnered the signatures it needed to introduced the iBookstore…It provided the Publisher Defendants with the vision, the format, the timetable and the coordination that they needed to raise e-book prices. Apple decided to offer the Publisher Defendants the opportunity to move from a wholesale model – where a publisher receives its designated wholesale prices for each e-book and the retailer sets the retail price – to an agency model, where a publisher sets the retail price and the retailer sells the e-book as its agent.”

• Apple as Most-Favored Nation. “The agreements also included a price parity provision, or Most-Favored nation clause, which not only protected Apple by guaranteeing it could match the lowest retail price listed on any competitor’s e-bookstore, but also imposed a severe financial penalty upon the Publisher Defendants if they did not force Amazon and other retailers similarly to change their business models and cede control over e-book pricing to the Publisher. As Apple made clear to the Publishers, “There is no one outside of us that can do this for you. If we miss this opportunity, it will likely never come again.”

• On e-book prices rising “virtually overnight.” “Through the vehicle of the Apple agency agreements, the prices in the nascent e-book industry shifted upward, in some cases 50% or more for an individual title. Virtually overnight, Apple got an attractive, additional feature for its iPad and a guaranteed new revenue stream, and the Publisher Defendants removed Amazon’s ability to price their e-books at $9.99.”

• On publishers hating Amazon’s discount strategy. “On a fairly regular basis, roughly once a quarter, the CEOs of the Publishers held dinners in the private dining rooms of New York restaurants, without counsel or assistants present, in order to discuss the common challenges they faced, including most prominently Amazon’s pricing policies…As [Hatchette CEO David Young] put it, “I hate [Amazon’s] bullying behavior and will be happy to support a strategy that restricts their plans for world domination.”

• On Eddy Cue’s negotiations on behalf of Apple. “As a master negotiator, Cue came well prepared for his meetings.He knew how to convey Apple’s condition for entry [into the e-book market] and at the same time give the Publishers an incentive for entering, almost overnight, into a partnership with Apple. He decided to entice the Publishers by convering an unambiguous message that Apple will willing to sell e-books at prices up to $14.99, that is, at a price point $5 above Amazon’s price for many new releases and NYT Bestsellers.”

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Any fool knows that Apple did, in fact, conspire with the publishers to set prices. All you have to do is use Steve Jobs own written words which were very blunt and straight-forward. Jobs lived in his own “reality distortion” field and could suck others into it too.

Now Apple is just trying to be a bully with their expensive lawyers, to try to get their way — or maybe their lawyers just want to bill a lot of hours.